You can get essentially all the capabilities of the iPhone minus the phone/3g portions (but with WiFi) in the iPod touch. It will run all the iPhone aps (minus the phone ones obviously).
The $1,000 iPhone bills were people who didn't set their phones right when they were doing overseas trips and the phones kept trying to access stuff by linking back to the US networks, which is why the bills were so outrageous. It really hasn't been an issue since the early days of the first iPhone and the default behaviors have been changed and lockouts added to prevent that sort of thing from happening.
As far as the monthly bill goes the $120 sounds like it's for one notch below the unlimited everything plan (data/text/messages). My bill runs about $84 with taxes and fees, for the basic plan (450min talk/unlimited data/no texts). But I don't do a lot of talking on the phone and with the roll over minutes I rapidly build up more than I could ever use.
The user interface is really quite slick and it does get a lot of stuff very right about making it into a mini-computer and an extremely usable phone. The 3G data speeds are a vast improvement over those for the EDGE network, but they aren't going to match a fast broadband connection like cable or FiOS.
Basically I'm quite happy with it. Battery life is the main area where it could really use some improvement, but it just means I can't go a week in between charges like I could with my old phone.